Safe Bets in Troubled Times
Stocks may continue to tumble because of the credit crunch. But investors should continue to hold large-company stocks with little debt and strong overseas sales.
After a week of hyperventilating, take a deep breath. Despite the year's second-worst day of trading on August 9, the Dow Jones industrials, Standard & Poor's 500-stock index and the Nasdaq all ended the week slightly higher than where they began. The volatility may point to a correction, but the bears won't feast for long.
Hedge funds sparked the most recent bout of volatility. Jittery investors made a run on these funds, which prompted fund managers to sell highly leveraged assets to generate cash to pay redemptions. Such transactions rippled through the capital markets. That caused central banks worldwide to inject billions into the markets to keep them liquid. But because hedge funds are loosely regulated investment pools, no one has a clear idea of how exposed these funds are to subprime mortgages.
These hedge funds operate in darkness, so their unknown holdings and practices mask the extent of the supposed credit crunch. Many of these opaque funds own packaged investments whose value is affected by their exposure to subprime mortgages. Rising loan delinquencies and home foreclosures cause declines in the values of these securities, which force some of the worst-positioned hedge funds to sell higher-quality investments to remain solvent.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
There's no way to know how much and what lands on the sell desks. "The potential for hedge funds selling to meet redemptions is the biggest unknown in the markets," says Tobias Levkovich, Citigroup's normally bullish economist. He suspects that there will be more churning of stock portfolios and fear that it will continue to harm stock prices. The last week of July was in fact the second-worst in four years for hedge funds worldwide, with a loss of 3%, according to the Hedge Fund Research index.
Another question is whether there is enough money around for banks and other lenders to make good on previous commitments, such as already-announced mergers and takeovers. Central banks appear aware that credit is tight and appear to have a handle on it for now. "Ben Bernanke is very likely on top of the situation, and we think that the only question is timing in terms of the real rate relief that is surely coming down the pike," says David Rosenberg, Merrill Lynch economist.
However, the decline of the U.S. housing market and resultant credit crunch pose real threats to parts of the economy, especially some financial firms. But global growth will trump these problems over the next several months. That's why shares of U.S. companies with strong overseas exposure still make sense.
One that fits the bill is General Electric (symbol GE, $38.23). Demand from rapidly developing countries, such as China and India, for more roads, electricity and water will fuel the company's growth in infrastructure development, energy equipment and heavy construction.
Companies with dependable streams of revenue also make sense when there are questions about credit. Comcast (CMCSA, $25.44) has increased its sales by bundling its phone, cable and Internet services while offering more premium options.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
S&P 500 Hits New High on Jobs Friday Eve: Stock Market Today
The S&P 500 hit a new all-time closing high and most of the stocks in the Dow Jones Industrial Average were up the day before a critical jobs report.
-
New $6,000 'Senior Bonus' Deduction: What It Means for Taxpayers Over Age 65
Tax Changes If you’re an older adult, a new bonus tax deduction could provide a valuable tax benefit. Here's how it works.
-
If You'd Put $1,000 Into Sherwin-Williams Stock 20 Years Ago, Here's What You'd Have Today
Sherwin-Williams stock has clobbered the broader market by a wide margin for a long time.
-
If You'd Put $1,000 Into UnitedHealth Group Stock 20 Years Ago, Here's What You'd Have Today
UNH stock was a massive market beater for ages — until it wasn't.
-
DexCom, GE, SLB: Why Experts Rate These Stocks at Strong Buy
Wall Street gives these three diverse names Strong Buy recommendations with high potential upside.
-
What Tariffs Mean for Your Sector Exposure
New, higher and changing tariffs will ripple through the economy and into share prices for many quarters to come.
-
How to Invest for a Fall Interest Rate Cut by the Fed
A lot can happen between now and then, but the probability the Fed cuts interest rates in September is back above 80%.
-
Are Buffett and Berkshire About to Bail on Kraft Heinz Stock?
Warren Buffett and Berkshire Hathaway own a lot of Kraft Heinz stock, so what happens when they decide to sell KHC?
-
How the Stock Market Performed in the First 6 Months of Trump's Second Term
Six months after President Donald Trump's inauguration, take a look at how the stock market has performed.
-
If You'd Put $1,000 Into Berkshire Hathaway Stock 20 Years Ago, Here's What You'd Have Today
Berkshire Hathaway is a long-time market beater, but the easy money in BRK.B has already been made.